contract law essay

In determining whether an agency in the legal sense exists

According to Contract Act 1950, an agency’s authority may arise in a five ways, by expressing appointment by the principal, implied appointment made by the principal, ratification by the principal, by necessity (operation of law in certain circumstances) and by doctrine of estoppels or holding out.

As stated in S140 Contract Act 1950, authority of an agent can be expressed in written or oral form. Meanwhile, implied appointment held that certain circumstances of the case will infer the creation of an agency. It may arise by implication when a person holds out another person as the person is having authority to act for him by his words or conduct. In case Chan Yin Tee v. William Jacks and Co. (Malaya) Ltd [1964] MLJ 290, Chan, the appellant held himself out as Yong’s partner in a meeting with respondent company. Yong was a minor and they were registered as business partner in a business. Business was conducted between Yong and respondent company, but the price for the goods was not being paid. Because of this, the respondent company sued Chan and Yong. Court held that since Chan had held Yong as his agent, who has authority to do things on his behalf, so Chan was liable for Yong’s acts.

Besides, under implied appointment, it states that relationship of principal and agent could be existed between husband and wife. The presumption is wife has an authority to pledge her husband’s credit for necessaries suited to their living style. However, husband can rebut the presumptions in certain circumstances such as he has expressly prohibited his wife to pledge his credit, or warning had been given to the tradesman as not to supply his wife with goods or credit, or his wife was sufficiently provided for with goods of the kind in questions, or his wife was given a sufficient allowance for buying the goods without having to pledge her husband’s credit, or the order, though for necessaries, was unreasonable, taking into consideration her husband’s income at that time. If a husband is putting advertisement on newspaper to disclaim himself from being responsible for this wife’s actions, eventually this will not relieve him from his wife’s future debts if he used to settle the wife’s past debts. By right, he should inform the tradesman about his disclaimers. However, the husband is free from his wife’s debts if the debts are arise from new tradesman who give the credit to his wife after the advertisement.

Furthermore, by the Partnership Act 1961, S7, partners are accounted as each other’s agent when they are getting into a business partnership contract, so the authority of agency for one another is exists between business partners. Partners are two or more than two co-owners of a business, they own joint control to carry on businesses and share the profit and loss together.

Agency of ratification may arise followed by one of two situations; it can be either an agent who was properly appointed has exceeded his authority or a person who has no authority to act for the principal has acted as if he had the authority. As in S149 Contract Act 1950, when situation above happens, principal can elect either to accept or reject the contract, ratification will arise when principal accepts and confirm the contract. According to S150 Contract Act 1950, ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.

Ratification is retrospective, which means the date when the original contract was made will be taken into account of the contract, not the time of ratification was made. In case Bolton Partners V. Lambart (1889), an agent of Bolton Partners has acted as agent on behalf of Bolton to accept an offer from Lambart without any authority given by Bolton. Lambart revoked his offer before Bolton ratified the contract made by the agent. As ratification is retrospective based, the time was back to the time of acceptance made by the agent, not the time ratification was made, so Lambart was bound with the contract made.

There are a few conditions to be fulfilled to ensure the validity the ratification.

The act or contract must be unauthorized.

The unauthorized act must following the law recognition.

The agent must profess himself as agent to principal to third party during the time of the contract.

Case: Keighley Maxted & Co. V. Durant [1901] AC 240

The appellant, Keighley, had authorized an agent named Robert to buy wheat at a given price. Robert bought the wheat at a higher price from Durant, Keighley Maxted & Co. represented by its manager, Wright, to inform Robert that it will take the consignment of wheat regardless of the higher price. Later, Keighley failed to take up the wheat from Durant. Durant was forced to sell others at a lower price, so Durant sued Keighley and Robert on his loss damages. The House of Lords held that Keighley was not liable to Durant since there is no ratification as there is no disclosure of agency made by Robert during the time of contract.

The principal must exist at the time of contract.

Case: Kelner V. Baxter [1866] LR 2 CP 174

Kelner, a promoter acted as an agent made a contract to buy wine from Baxter to run a hotel on behalf of a company, but the company was not formally formed yet. Later, the company fell into liquidation. Baxter sued the company. Since the company didn’t exist at the time of contract made, it was treated as no contractual capacity to make the contract and the ratification of contract is void. As a result, the agent, Kelner was held liable on his action.

However, in Malaysia, following S35 Companies Act 1965, a company can ratify a contract that was made prior to its formation, and then the company will be bound with the date of the contract once the ratification is done.

There must be a contract to prove that the agent has entered into contract on behalf of on company which prior to its formation.

The company may ratify the contract upon its formation.

Once ratify, the contract’s date will follow the date the contract was made, not the date of ratification.

The principal must own contractual capacity during the time of contract made and also at the time of ratification. A minor can’t ratify a contract.

At the time of ratification, as stated in S152 Contract Act 1950, the principal must be acknowledged of all the material facts related to the contract unless it’s shown that he is intends to ratify without taking any facts into consideration.

The principal must also ratify the whole contract and partial ratification is not allowed.

The ratification must be made within reasonable time.

Case: Grover & Grover V. Mathew [1910] 2 KB 401

Ratification on a policy of fire insurance was made after a fire had happened, the principal ratified the agent’s act after the premises had been destroyed by fire. Therefore the ratification was held to be ineffective, because the ratification on agent’s act should be done before the loss of goods.

According to S153, CA 1950, any ratification made must not bring any damages or termination of right or interest to third party.

According to S142 Contract Act 1950, an agency may arise by necessity or in an emergency. Agency of necessity means a person may become the agent of another without being appointed as such under certain circumstances. For example, a deserted wife or a wife who is justified in leaving her husband and she has not working, can claim for the necessities of life from her husband according to the income and position of the husband even though her husband unwilling to fulfill this pledge. However, if she is has been given an adequate allowance and can support her own life either in money or in earning capacity, then there is no arise of agency by necessity as in case Biberfield v. Berens [1952] 2 All ER 237.

It is created when a person is delegated with another’s property and it becomes necessary to do something to conserve that property although he has no express authority to do so. Besides, there must be already some existing contractual relationship between the principal and the person who acts on his behalf. For instance, relationship between the owner (principal) and the master of a ship (agent) and relationship between an owner (principal) and a carrier of goods (agent) are examples that show existing contractual relationship between principal and the person who acts on his behalf. This kind of relationship can be illustrated through the example as followed: Goods are sent by truck to A at Tanjung Malim with directions to send them immediately to B at Johor Bahru. A may sell goods at Tanjung Malim if the goods will not be able to bear the journey to Johor Bahru.

However, to create an agency by necessity, there are three conditions have to be satisfied:

Overall, fulfillment of these three conditions can be illustrated in case Prager v. Blatspiel, Stamp and Heacock Ltd [1924] 1 KB 566 which was regarding there must be a genuine necessity and the agent must act bona fide. After the outbreak of First World War, the plaintiff who was from Romania contracted to buy a number of furs from defendant who was from London. Plaintiff was intended to wait and ask defendant to deliver the furs which were largely paid until the war was over. At that time, Romania was occupied by the Germans and communication between both parties became impossible. The furs that were stored were increasing in value. Towards the end of the war, defendant began to sell the furs locally with assumption that occupation of German will be continued. When the war ended, the plaintiff demanded delivery from defendant but the defendant only told the plaintiff that the furs had been sold off under agency of necessity. The court held that there was no agency of necessity because the plaintiff was willing to wait for goods which were appreciating in value and it is clear that defendant acted against bona fide when defendant sold off the furs which got higher value at that time.

a) It must be a situation that impossible for the agent to get the principal’s instruction.

In the case of Springer v. Great Western Railway Company [1921] 1 KB 257, Great Western Railway Company as defendant agreed to carry plaintiff’s tomatoes from Channels Island to London, by ship to Weymouth and by train to London. The ship was stopped at Channels Island for three days due to bad weather. Eventually, when the ship arrived at Weymouth, defendant’s employees were on strike, tomatoes were unloaded by casual laborers but it was delayed for two days. At that time, some of the tomatoes were found to be bad. So, defendant decided to sell the tomatoes as they felt that tomatoes could not arrive in Covent Garden market in a good and saleable condition. When plaintiff found out about this, plaintiff wanted to claim damages from defendant. The court was held that plaintiff was entitled to damages because defendant ought to have communicated with the plaintiff when the ship arrived at Weymouth to get instruction. As defendant has failed to communicate with plaintiff when they could have done so, thus, there was no agency of necessity.

b) The agent’s action is necessary

This can be said as the agent’s action is to prevent loss to the principal with respect of goods, such as perishable goods. However, agency of necessity does not arise when goods are merely sold because of inconvenience. In the case of Great Northern Railway Co. vs. Swaffield (1874) LR 9 Exch 132, the plaintiff railway company had delivered a horse to a station for defendant. When the horse arrived at the station, there was nobody to collect it. So, the plaintiff sent it to a stable. A few months later, the plaintiff paid the stabling charges and wanted to claim the expenses from the defendant. In this case, the court was held that the plaintiff is allowed to claim those expenses from defendant even though he is involved in the extension of doctrine of agency of necessity to include couriers of goods by land. There was an agency of necessity because the plaintiff was found to have had no choice under situation mentioned above but to arrange for the proper care of the horse.

If there is no urgency and then goods are sold just because they are inconvenience to the agent, then agency of necessity does not arise. The agent who sells the goods may be liable in tort for conversion because those goods are not belongs to the agent. For example, in case of Sachs v. Miklos [1948] 2 KB 23, sale of furniture done by agent without urgency happened before it is sent to the destination or a car being sold by agent in case Munro v. Willmott and Co. [1948] 1 KB 295 under a condition which has no urgent thing happened .

c) Agent of necessity has acted in good faith (Bona fide)

Agent may arise by estoppels, a person cannot be bound by a contract made on his behalf without his authority generally. But, if he allows third party to believe that X is his agent by his words when X is not agent of him and the third party relies on it, he will be stopped or precluded from denying the existence of X’s authority. For example, if X tells B in the presence of C that he (X) is C’s agent and C does not deny this statement, C cannot later deny that X is his agent if B sells good to X believing him to be C’s agent and later sue for the price. Agency by estoppels can be illustrated through case of Povey v. Taylor (1966) 116 NLJ 1656. The defendant let a room in their premises to B, who conducted a similar kind of business to theirs from it. B had business leaflets printed by the plaintiffs and B acknowledged defendant about this. Invoices sent to defendant were not challenged by them. The plaintiffs then sued the defendant for payment. The court of appeal held that it was reasonable for the plaintiffs to infer that B was ordering the work with the defendant’s authority, so the defendants were stopped from denying that authority.

2(b)

As an agent to his principal, he is responsible not to make any secret profit out of the performance of his duty. Secret profit can be defined as a bribe such as payment in term of secret commission or a ‘kick back’. According to Mr. Justice Slade in Industries and General Mortgage Co. v. Lewis [1949] 2 ALL ER 573 at 575, a bribe for the purpose of the civil law means the payment of a secret commission from the person making the payment to the agent which he is dealing with and then fails to disclose to the person with he is dealing with. Besides that, secret profit also refers to any financial benefit which received by an agent in terms of commission or other remuneration agreed by both the principal and agent.

Once an agent received a secret profit, the law presumes that he has been affected by the payment to the detriment of his principal. It does not have the necessity to prove dishonest action or improper use of position of the agent. If the principal knows about the extra profit and agree to it, then only the agent is entitled to keep the profit. So the profit is no longer secret. If however the profits are secret, then the following remedies are available to the principal.

Firstly, the principal may repudiate the contract, particularly if he feels that it is disadvantageous to him. With reference to S168 Contract Act 1950, if an agent manage his account in the agency business, without first getting the agreement from his principal and acknowledge him with all significant circumstances which have come to his knowledge on the matter, the principal may cancel the transaction. Principal need to show either any material facts have been dishonestly hidden from him by the agent, or that the agent has brought unfavorable condition to him. For example, Ahmad directs Bane to sell Ahmad’s estate. Bane buys the estate under the name of Celan for himself. Ahmad may repudiate the sale when he discovered that Bane has bought the estate for himself, provided if he can show that Bane has dishonestly hidden any material fact, or the sale has brought disadvantageous to him.

Secondly, the principal may recover the amount of the bribe from the agent. According to S169 Contract Act 1950, if an agent manage his account in agency business instead of on behalf of his principal and at the same time without the awareness of his principal, the principal is allowed to reimburse from the agent any benefit which may have belong to him from the transaction. For example, Anthony is the principal of Brian. He directs Brian to buy a certain house for him. Brian tells Anthony that the house cannot be sold to him. However Brian buys the house for himself. After that Anthony discovers that Brian has bought the house, he forces him to sell it to Anthony at the price he gave for it.

The principal has the right to recover the bribe or secret profit not only to the extent where in a transaction an agent sells at a price higher than was set by him, it also includes secret profit passed on to another person by agent. It matters not that the agent has not taken the profit himself. In the case of Tan Kiong Hwa v. Andrew S.H. Chong [1974] 2 MLJ 188, the defendant was the managing director of house agency company. The plaintiff has bought a flat from that company. The plaintiff later authorized the defendant as his agent to sell the flat for $45,000. However the defendant sold the flat for higher price, which is $54,000. The difference of $9,000 was credited to the company. The court held that the plaintiff was entitled to recover $9,000 from the defendant as the defendant had breached his duty as an agent.

Thirdly, the principal may reject to pay his commission or other remuneration to the agent. In connection with S173 Contract Act 1950, an agent who is guilty of bad controlling in the agency business is unable to claim any remuneration in respect of that area which he has misconduct. For example, X employs Y to recover RM50,000 from Z, and to invest it on good security. Y discovers the RM50,000 but invest only RM40,000 on good security. He invest the remaining RM10,000 on security which he has knowledge that the security would be bad. This results X loses RM2,000. Thus Y is allowed to remuneration for recovering the RM50,000 and for investing the RM40,000. He is not allowed to any compensation for investing the RM10,000 and he must make good the RM2,000 to X.

As in the case of Andrews v. Ramsay and Co [1903] 2 KB 635, where the principal successfully recovered both the commission paid to the agent plus the secret commission received by his agent from a third party. In that case, the plaintiff directed the defendant to sell property and agreed to pay him commission of 50 pounds. The defendant received 100 pounds from a purchaser as deposit for the property. The defendant paid 50 pounds to the plaintiff and kept the other 50 pounds in payment of his commission with the plaintiff’s knowledge. However the plaintiff learnt that the defendant had also received another 20 pounds as commission from the purchaser. He sued his agent to recover this 20 pounds and also the 50 pounds he had paid the defendant initially. The court held that he could recover both of them.

Besides that, if agent makes any secret profit out of his duty, the principal may dismiss the agent for breach of duty. In the case of Boston Deep Sea Fishing and Ice Co. v. Ansell (1888) 39 Ch D 339, Ansell was a director of BDSFI, employed on a fixed-term contract. He was also secretly a director of a boat-building company. He ordered many boats for BDSFI from his other company due to incentives he received on sales. Ansell was dismissed because he was found incompetent. He was being sued for wrongful dismissal. While preparing for their defence, Boston discovered Ansell’s secret dealing. At court, Ansell proved that he was competent however the court held that the dismissal was justified due to the secret dealing.

Last but not least, the principal may sue the agent and the third party giving the bribe for damages for any loss he may have sustained through entering into the contract. As in the case of Mahesan v. Malaysian Govt. Officers Cooperative Housing Society Ltd [1978] 1 MLJ 149, the appellant was a director and also a secretary of the co-operative society which belong to respondent. He brought land at a price of $944,000 from the vendor who had earlier paid $456,000 for it. The appellant knew of this fact however he failed to inform the society. The society discovered the fact only after the sale was done and discovered the appellant had received $122,000 as secret commission from the vendor. As a result, the Privy Council held that the respondent could recover either secret commission or the amount of the actual loss he suffered by as a consequence of entering into the contract.

However when the agency or the business of the agency no longer exists, the duty of informing to the principal for secret profits cease to apply. One of the examples is termination upon the outbreak of war as in the case of Nordisk Insulin-Laboratorium v. Bencard Klt [1953] 1 All ER 986. In that case, the defendants acted as agent for the plaintiffs. They import and sell the liquid insulin. But the agency was come to the end due to the outbreak of war. the property was vested in the Custodian of Enemy Property. The agent purchased insulin and re-sold it at a profit. The Court of Appeal held that at the time of the resale of the insulin, the agency has been terminated. The insulin was no longer belongs to plaintiffs. Consequently, the defendants in making the business of the insulin could not be regarded as the agent of the plaintiffs.

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